An exchange-traded fund (ETF) is a type of investment fund that holds potentially hundreds, sometimes thousands, of individual shares or bonds.
ETFs combine some of the features of mutual funds with those of individual shares. Like shares, they trade on an exchange, such as the London Stock Exchange, meaning they can be bought or sold at any time of the trading day at a known price (we explain how Vanguard trades ETFs later on). Mutual funds, on the other hand, are usually priced once a day.
ETFs are designed to track a particular index, such as the FTSE 100 or Bloomberg Global Aggregate Index1 and offer a simple and low-cost way to hold a broad spread of shares or bonds.
Spreading your investments like this helps to reduce your risk, compared to owning just a handful of individual shares or bonds.
What’s the difference between an ETF and a mutual fund?
ETFs share many of the same characteristics as mutual funds. They pool investors’ money, which can bring cost benefits. Most are highly regulated, and any investor money is ring-fenced from the fund provider’s own assets.
But the key difference is in the way investors buy and sell ETFs. Unlike with mutual funds, where it is the fund provider who prices the fund and creates or redeems fund units to meet client demand, ETFs trade like shares on stock exchanges.
They trade throughout the day and have two prices that are shown on the stock exchange: an ask price (the price you buy an ETF for) and a bid price (the price you sell the ETF for). The difference between the two is called the ‘bid-ask spread’.
The price of ETF shares traded on the market depends on the supply of - and demand for - those shares as well as the value of the fund’s investments.
So, which is for you?
Our funds and ETFs tend to track different indices, so your first port of call may be to consider which index you actually want to invest in.
As already mentioned, ETFs are very similar to mutual funds, apart from the way they’re bought and sold. The other factor, and one that may be key in helping you make your decision, is cost.
Because ETFs are generally cheaper to run than regular funds, they can come with a lower ongoing fee. However, you may need to pay a stockbroker fee when you buy or sell as they’re traded on the stock market.
At Vanguard, you can place an ETF trade at no additional cost which we then perform via “bulk dealing” - this is where we combine your trade with that of other investors and place bulk deals twice a day. Your order must be placed before the cut-off times of 10.15am or 2.10pm.
Alternatively, if you would prefer a live price, you can use our Quote & Deal service, charged at £7.50 per transaction. This is to cover our stockbroker costs.
ETFs and mutual funds can help you build a portfolio that is in line with your financial goals. Ultimately, we believe that long-term investing success is built on four simple principles:
Create clear, appropriate investment goals
Develop a suitable balance of shares and bond using broadly diversified funds
Stay disciplined and ride out market volatility.
By focusing on these principles – all areas which you can control – you can put yourself and your investments in the best position to achieve your goals.
1 The FTSE 100 Index is the largest 100 listed companies in the UK and the Bloomberg Global Aggregate Index is a flagship measurement of global investment grade debt. Investment grade bonds have a high-quality rating from third-party ratings agencies and are considered to be at a lower risk of default (in other words, the bond is more likely to be repaid at the end of the term).
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.
For further information on risks please see the “Risk Factors” section of the prospectus.
Vanguard Asset Management Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this article, please contact your financial adviser.
This article is designed for use by, and is directed only at, persons resident in the UK.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
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